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International Portfolio Holdings and Swiss Franc Asset Returns

  • Peter Kugler

    ()

  • Beatrice Weder

    (University of Basel)

This paper revisits the puzzle of low returns on Swiss Franc assets using a new data set of portfolio holdings of residents and non residents at Swiss banks. The main findings are as follows. First, we find that the return anomaly is present only for fixed income assets and not for equity. Second, it is mostly due to a long run deviation from uncovered interest rate parity, not a deviation from purchasing power parity. Third, it is unlikely that foreign demand for Swiss assets (possibly due to banking secrecy) is driving down returns: This demand is quantitatively small especially for Swiss Franc fixed income instruments. A dynamic factor analysis confirms that foreign demand had almost no impact on Swiss Franc asset prices. Finally, we propose a new explanation for low returns on Swiss fixed income assets, namely the diversification benefits offered by these instruments. Applying reversed portfolio optimization to back out the implied returns reveals that the estimated pattern of this returns conforms very well with the observed pattern.

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Paper provided by Faculty of Business and Economics - University of Basel in its series Working papers with number 2004/08.

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Date of creation: 2004
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Handle: RePEc:bsl:wpaper:2004/08
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  1. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  2. Fountas, Stilianos & Wu, Jyh-lin, 1999. "Testing for Real Interest Rate Convergence in European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(2), pages 158-74, May.
  3. Gary Chamberlain & Michael Rothschild, 1982. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," NBER Working Papers 0996, National Bureau of Economic Research, Inc.
  4. Kugler, Peter & Neusser, K, 1993. "International Real Interest Rate Equalization: A Multivariate Time-Series Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(2), pages 163-74, April-Jun.
  5. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  6. Mishkin, Frederic S, 1984. " Are Real Interest Rates Equal across Countries? An Empirical Investigation of International Parity Conditions," Journal of Finance, American Finance Association, vol. 39(5), pages 1345-57, December.
  7. Dutton, Marilyn Miller, 1993. "Real interest rate parity new measures and tests," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 62-77, February.
  8. Modjtahedi, Bagher, 1988. "Dynamics of real interest differentials : An empirical investigation," European Economic Review, Elsevier, vol. 32(6), pages 1191-1211, July.
  9. Christian Dreger & Christian Schumacher, 2003. "Are Real Interest Rates Cointegrated? Further evidence based on paneleconometric methods," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(I), pages 41-53, March.
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